This invention relates generally to a method and system for issuing a convertible financial instrument and, more particularly, to a method and system for issuing a convertible financial instrument in compliance with Sharia principles.
Within the United States, and throughout the world, the financial industry is a very complex and diverse industry. Businesses are oftentimes required to borrow money or other capital from the financial industry for a wide range of expenses. For example, a business may need to borrow money to expand its operations. However, in at least some cases, when a business is required to borrow a significant amount of money (e.g., hundreds of millions of dollars), the business may not be able to locate a single bank or lending institution willing to lend the full amount to the business. In such cases, the business may be required to issue bonds, other debt instruments and/or equity instruments in a public market to raise the capital needed. In these types of financial offerings, instead of a single bank lending a significant amount of money to the business, hundreds of people lend a smaller amount of capital to the issuer of the bond or, in case of an equity instrument, shares of stock until the issuer gets their desired amount of capital. These bonds are know as debt instruments. These shares of stock are known as equity instruments.
A purchaser of a bond, however, does not loan their money to the bond issuing business for free. The business must typically pay the purchaser a premium or “coupon” at a pre-determined interest rate in exchange for using the purchaser's money. These interest payments are usually made every six months until maturity of the bond. There are some exceptions to this such as zero coupon bonds which instead give the purchaser a large lump-sum payment once the bond has reached maturity.
A purchaser of a share of stock owns an equity interest in the business. In other words, a shareholder has an ownership interest in the business and has an interest in any surplus of the business after payment of debt.
Because the financial industry is such a complex and diverse industry that practices throughout the world, the financial industry must also be sensitive to a variety of religious and cultural laws. For example, Islamic finance is finance in accordance with Sharia principles. Sharia is a law system inspired by Islam and followed by Muslims throughout the world. One of the essential beliefs of Islamic finance is the prohibition of payment or receipt of interest, or “riba”. Under Sharia principles, lending and/or dealing in money in the same way as one would trade commodities is prohibited. Returns on loaned money must be based on actual profits generated and not on pre-determined interest rates. A financial institution that lends money must take part in the risk to make a legitimate gain in accordance with Sharia law.
Accordingly, businesses interested in raising capital in the Muslim world and financial institutions interested in servicing such businesses must be able to offer financial instruments including debt-related instruments that comply with Sharia law. However, a typical debt-related instrument (e.g., a bond) does not comply with Sharia law because these types of debt-related instruments include a return paid by the business to the investor wherein the return is based on interest payments and not based on profits generated by the business. Therefore, at least in the Muslim world, financial institutions must be able to offer financial instruments that include a return paid by the business to the investor wherein the return is based on actual profits generated and not on pre-determined interest rates.